It is difficult to think that you might read a business book that can change your life, but this book might just do that - your business life, that is. I recently bought Collins' Good to Great, but saw this and decided to read it first. Having started a business in 2004 and a second, subsidiary business just over a year ago, I wanted to find ways in which to better react to what are difficult times, with recession and a whole lot of changes and avoid the temptation just to pack it all in and retire. Collins describes 5 steps or stages of decline: Hubris born of success; Undisciplined pursuit of more; Denial of risk and peril; Grasping for salvation and lastly, Capitulation to irrelevance or death. Even over a period of 10 years, I have seen my own business go through the first four stages and am only just beginning to see some green shoots of regeneration. The book, far from being doom and gloom, offers advice and positive steps, with good examples, for how to counter risks at every stage: obviously the further down the slipery slope you are, the harder it will be to recover, but not impossible and this is the point of the book - how to start to become great again. I found myself marking pages and returning to different sections of the book and using it it to plan, train and retrain myself and others into a different way of thinking. I have read and studied many books on business and management: while much is useful, even illuminating, few have the impact, for me at least, of this book. Counter-intuitively, a book about how companies fail, might just be the thing to ensure against failure, identify with ones own mistakes and make sure they will not be repeated. If you are in business and in tough times, I heartily recommend this book: if you are enjoying good times, you might just benefit also: a great read.
In How the Mighty Fall, Collins examines how and why once great companies have since declined. Relying on many years of research of several thousand companies, he identifies five stages of organizational decline: Hubris Born of Success, Undisciplined Pursuit of More, Denial of Risk & Peril, Grasping for Salvation, and Capitalization to Irrelevance or Death. This is a process that can continue for many years and, frequently, is not recognized - or at least not taken seriously -- until it is too late. As Collins explains, "The origins of this work date back to more than three years earlier, when I became curious about why some of the great companies in history, including some once-great enterprises we'd researched for Built to Last and Good to Great, had fallen. The aim of this piece is to offer a research-grounded perspective of how decline can happen, even to those that appear invincible, so that leaders might have a better chance of avoiding their fate...By understanding the five stages of decline discussed in these pages, leaders can substantially reduce the chances of falling all the way to the bottom, tumbling from iconic to irrelevant. Decline can be avoided. The seeds of decline can be detected early. And as long as you don't fall all the way to the fifth stage, decline can be reversed. The might can fall, but they can often rise again."
These are the five stages to which Collins refers:
1. Hubris born of success: Faith and confidence become pride and arrogance. Leaders become careless and workers become complacent. "We're so great we can do anything!"
2. Undisciplined pursuit of more: That is, more scale, more growth, more acclaim, "more of whatever those in power see as `success' and allow their companies to "stray from the disciplined creativity that led them to greatness in the first place."
3. Denial of Risk and Peril: Although internal warning signs begin to mount, they are ignored because "external results remain strong enough to `explain away' disturbing data or to suggest that the difficulties are `temporary' or `cyclic' or `not that bad,' and `nothing is fundamentally wrong.'"
4. Grasping for salvation: The cumulative signs of peril and/or evidence of risks-gone-bad force leaders to decide: return immediately to being and doing what achieved greatness before or "grasp for salvation"? If the latter, the company will fall into Stage 4.
5. Capitulation to irrelevance or death: "The longer a company remains in Stage 4, repeatedly grasping for silver bullets, the more likely it will spiral downward. The process of erosion and deterioration continues until either the leaders just sell out or "the institution atrophies into utter insignificance; and in most cases, the enterprise simply dies outright."
Collins rigorously examines each of these five stages and suggests what lessons can be learned from companies that failed as well as other companies that fell and then rose again. For example, he explains how ten of the eleven great companies featured in Good to Great "fell [to Stage 2] despite showing behaviors contrary to complacency": Addressograph, Ames, Bank of America, Circuit City, HP, Merck, Motorola, Rubbermaid, Scott Paper, and Zenith. He then explains how each of the ten and A&P (that had shown signs of complacency) "grasped for salvation" in Stage 4.
With regard to fallen companies that rose again, Collins cites Xerox, Nucor, IBM, Texas Instruments, Pitney Bowed, Nordstrom, Disney, Boeing, HP, and Merck. "What do these companies have in common? Every one took at least one tremendous fall at some point in its history and recovered. Sometimes the tumble came early, when they were small and vulnerable, and sometimes the tumble came when they were large, established enterprises. But in every case, leaders emerged who broke the trajectory of decline and simply refused to give up on the idea not only of survival but of ultimate triumph despite the most extreme odds. And like [Anne] Mulcahy [CEO of Xerox], these leaders used decline as a catalyst. As Dick Clark, the quiet, longtime head of Merck manufacturing who became chairman after [Ray] Gilmartin, put it, "A crisis is a terrible thing to waste."
After reading this book, I have a much understanding of why so many of the companies that Tom Peters and Robert Waterman cite in Search for Excellence are no longer "excellent" or even in existence, as well as why so many of the companies cited by Collins and Jerry Porras in Built to Last are no longer "visionary" and why so of the companies that Collins cites in Good to Great are no longer great: they proceeded through a five-stage process of decline. Could they have avoided that process? Yes. Once embarked upon it, could they have reversed the process? Yes, at least before falling into Stage 5. With all due respect to Jim Collins' first two books, I think How the Mighty Fall (whose narrative is only 123 pages, followed by 83 pages of Appendices and Notes) will be his most valuable achievement thus far. Why? Because what he shares in it will help leaders to either avoid or recover from a subtle but relentless process of organizational suicide.
"Come, let us build ourselves a city, and a tower whose top is in the heavens; let us make a name for ourselves, lest we be scattered abroad over the face of the whole earth." -- Genesis 11:4
How the Mighty Fall takes a methodology similar to Built to Last and Good to Great and searches for differences among paired companies (Loser--Winner; A&P--Kroger; Addressograph--Pitney Bowes; Ames--Wal-Mart; Bank of America--Wells Fargo; Circuit City--Best Buy; Hewlett Packard--IBM; Merck--Johnson & Johnson; Motorola--Texas Instruments; Rubbermaid--None qualified; Scott Paper--Kimberly-Clark; and Zenith--Motorola) As you can see, it all makes for strange bedfellows (Motorola is on both sides of the divide and Rubbermaid doesn't have a winning comparison partner). As before, the analysis relies on public information from that period (such as annual reports, business journalism articles, and analyst reports).
From these data, Jim Collins discerns the following taxonomy of stages:
1. Hubris (excess pride) due to prior success
2. Undisciplined pursuit of more
3. Denial of risk and peril
4. Grasping for salvation
5. Capitulation to irrelevance or death
Reaching any one of these stages doesn't mean that stage 5 is inevitable in Collins' view.
The result is more like a monograph than a full business book with limited examples and observations. Many readers will find themselves hungering for more.
I was grateful to Mr. Collins for the excellent way that he defined and described his cases. As a result, I was able to look into what he was measuring to see what else might be there.
I had the good fortune to work with most of these companies as a consultant either just before or during the measurement period. As a result, I was able to think about what people inside the company had told me at the time about what they were doing and why they were doing it as well as what I observed about how they went about doing their work.
From those additional perspectives, I thought there were some other lessons:
1. Capable continual business model innovators (Kroger, Pitney Bowes, Wal-Mart, Wells Fargo, Best Buy, IBM, TI, and J & J) outperform those who mostly try to make old business models more efficient and effective.
2. Companies are more likely to try to do too much and swerve off in weird directions because the CEO feels insecure (Addressograph, Ames, Bank of America, Merck, Motorola, Scott, and Zenith) compared to a predecessor and the predecessor's track record (or a competitor CEO and that CEO's track record) rather than because of excess pride.
3. Denial of risk and peril arrives long before the company's performance peaks (Addressograph, Ames, Bank of America, Circuit City, Motorola, Scott, and Zenith). It just shows up as a problem later after a change in the environment causes the company to be exposed to worse results because of risk than before.
4. Ignorance about how to do big acquisitions successfully is rampant in large organizations (Ames, Hewlett Packard, Merck, and Motorola). Do a difficult large acquisition without understanding how to succeed, and you will probably fall flat on your face. Your stock will fall flatter than a pancake.
5. Pursuit of seemingly higher-growth markets is an irresistible lure for the portfolio-strategy-focused CEO (these names shall remain unidentified, but they know who they are) regardless of the real opportunity (think of the AOL-Time Warner merger).
This subject, I think, would be much better studied as a methodology by long-term tracking studies that include annual interviews and visits with a large number of competitors, customers, suppliers, and employees among the comparison companies. Perhaps someone from academia will move beyond the desire to write a quick case and do this kind of fundamental research to help answer the question: "How can we know when we are headed for a fall?"